Fonterra fairytale ends as milk payouts tumble

By Hugh Stringlemen, agricultural editor

Friday 26th July 2002

ALAN ROBB: Concerns about the group's governance and disclosure

Fonterra Co-operative Group's credibility with its 13,000 shareholders went on the line this week when 2001/02 season milk supply payouts were confirmed.

Fonterra's result of $5.30/kg milksolids supplied was 13c below that of Westland Milk Products and a whopping $1.47 below small and specialised Waikato co-op Tatua.

Westland's 335 suppliers have been vindicated in their resistance to Fonterra offers of inclusion and Tatua's tight group of 132 farmers are the envy of the industry.

They each received $70,000 more last season than Fonterra's average payout of just over $400,000.

Tatua passes on to suppliers 55% of its total turnover of $115 million.

Fonterra achieved a net total payment to suppliers equal to 42% of turnover, although it is not immediately apparent what Fonterra includes in its $13.9 billion turnover sum.

The dairy giant trades milk between its divisions and markets products made from non-New Zealand milk.

Nor has Fonterra explained how much capital will be required in its much-heralded joint ventures with Nestle, Arla and others inside of world dairy markets.

Canterbury University senior accounting lecturer Alan Robb said not enough had been disclosed by Fonterra to make detailed comparisons with the records of its co-operative predecessors and its much smaller rivals.

Nevertheless, he said, there were worrying aspects in Fonterra governance and disclosure policies, including the valuing of inventories, a lack of cashflow data and the board's willingness to dip into reserves by $50 million to confirm the $5.30 final payout.

Fonterra's "new economics" included independent Standard & Poor's assessments of share value and commodity milk price (CMP) to help rank performance.

"The highest price an efficient competitor could pay for milk in New Zealand in respect of the past season (the CMP) would have been $5.45/kg milk solids," Fonterra chief financial officer Graham Stuart said.

In light of the Tatua result, such a statement is now confusing for shareholders, not helpful in assessing Fonterra's first-year performance.

Total milk processed in the past season was up 6% on the flow in 2000/01 to predecessors New Zealand Dairy Group and Kiwi Co-op Dairies.

Total assets at May 30 were $11.8 billion, up $1.9 billion on the year earlier. Total debt of $4.8 billion was up $629 million.

Therefore shareholders' equity has improved from 33% to 38%, and stands at $4.485 billion.

Foreign exchange hedging activities clipped 19c/kg from the final payout, and merger accounting treatments snipped a further 12c, Mr Stuart said.

However, 5c was added back from reserves, as directors sought to confirm Fonterra's February forecast of a $5.30 result for the season.

In the second half-year international dairy commodity prices plummeted and Fonterra's payout suffered partly because of higher May milk flows as farmers continued to wring out the last benefit from a $5 payout.

By that time Fonterra had already signalled a massive drop to $4 in the 2002/03 season, which began on June 1.

This week it reduced that estimate even further, to $3.70, adding another $300 million to the impact on rural economies.

Fonterra's consumer products business, New Zealand Milk, increased sales revenue 16% and ebit by 29% to $336 million.

But at $5.6 billion turnover, it is still the minority division alongside processing and commodities arm NZMP.

Added-value activities contributed about 10% of the basic milk payout and the fair value of a supplier's share remains at $3.85, on a recommendation from Standard & Poor's.

Further analysis will have to await the publication of the Fonterra annual report in August, Mr Robb said.

Dairy Farmers of New Zealand chairman Kevin Wooding congratulated Tatua for its amazing payout, saying that it set a new benchmark for the much-bigger Fonterra.

But Tatua chairman Alan Frampton said the two dairy processors are not comparable, in that Tatua enjoys steady market demand for its specialised nutritional products.

Tatua's result reflected 10 years of investment in a highly technical product range, he said.

ON THE WEB

http://www.fonterra.com/

Comments from our readers

No comments yet